Dunn: Adopting Sustainability Enhances Access to Capital, Cost Reduction

Wayne Dunn

The President and founder of the Corporate Social Responsibility (CSR) Training Institute, Wayne Dunn, who was in Nigeria recently to make a presentation at the Bankers’ Committee, in this interview speaks about the importance of adopting sustainability principles in organisations. Obinna Chima presents the excerpts:

What do you think are the importance of the sustainability principles?

Sustainability is increasingly important for businesses all over the world, especially in banking and finance. That is because sustainability is a key risk area. It is also an opportunity area. In fact, in reality, the Nigerian banking and finance sector, has demonstrated leadership in terms of adopting the principles. The Nigerian Sustainability Banking Principles (NSBP) were adopted in 2012, which was a long time ago. That is very advanced. You add that to the Nigerian Stock Exchange (NSE) and its publication of sustainability reports going back a few years. So, there is a strong recognition of the importance of sustainability.

You described sustainability as a key risk area. What do you mean by that?

Social issues and environmental stewardship are required performance of businesses, whether it is regulated or not. You just need to go back and look at United Airlines. About a year ago, they had an incident whereby the airline was overbooked. They removed the passenger forcibly from a flight. The effect of that took $1 billion off their market capitalisation overnight. That was real money. So, sustainability issues have become important valuation issues. What has happened over the last years is that the composition of values in companies has changed. About 30-40 years ago, the average share price was based primarily on book value. That is the value of plant, materials, equipment, assets and cash. It was tangible and so you could touch it. So, management had a focus of what the value was. That has reversed. According to the Boston College or Morgan Stanley and others, right now, we have on average, 83 per cent of the average share price sitting in markets is based on intangibles, reputational capital, the ability to manage risk and other factors that aren’t on the books. So, companies are realising that they need to be successful and strategic in managing those areas. Sustainability is much more important today, than it was five years ago. So, it is going to continue to get more important. Stakeholders of all types are demanding that businesses deliver social value and at same time deliver shareholder value. The social media has created a place whereby unmet expectations can be punished. Smart businesses are realising the opportunities in sustainability and the shareholders are demanding more. So, it is impossible to be strategically successful and simply treat it as zero sum allocation. So, smart businesses are learning to create that line. Businesses that don’t invest in society and don’t engage in society run the risk of losing regulatory approval as well as of losing support. Businesses that are effective in investing in society are much more effective and attracting in retaining good employees. If you look at the capital market, 25 per cent of global capital markets is now made up of impact investment funds. Of the remaining 75 per cent, 82 per cent of that has Environmental, Social and Governance (ESG) elements. That is because they recognise the risk and the fact that sustainability is an emerging complex issue that needs to be managed strategically. So, that pressure is driving businesses to be smarter on how they manage it. I worked with a bank in Dubai. They had targeted banking services for excluded sectors for physically and mentally handicapped persons and they took that on. What they found was that as they were contributing to social good, it was also driving value for them. Almost every family had someone who was physically and mentally challenged and as they were making banking services available to these class of persons, those families were more predisposed to work with the bank. That created more efficiency inside the bank and they were able to attract and retain more employees. So, that is a strategic connection and was one of the things we discussed at the Bankers’ Committee meeting. Sustainability is on the path to profit.

There is also the difficulty in drawing a line between allocating scarce resources to sustainability and profitability. Did you discuss this at the meeting and how can that be resolved?

Any CEO who really thinks and believes that sustainability is an area you spend money on and don’t get value needs to go back to school because such a person is not going to be an effective CEO. The board and shareholders should be re-schooling the CEO so that he can learn to manage a modern world.

How can Nigerian banks enhance capacity in this area?
One of the things I saw and was impressed by is that we have some amazing sustainability champions inside the banks. Where there are some challenges is that much of the sustainability work is looking at how to deliver value to society outside the bank. And what is important is to see how to use that to actually create value for the banks. So, in that scenario, there can be more capacity development. The reality is that the sustainability champions and leaders in the banks need to get better in talking to their own internal stakeholders. They need to sit down with the Chief Finance Officer (CFO) and understand what keeps the CFO awake at night and how can sustainability help to address it. The CFO is a function in which many of them think does not have value connection with sustainability other and that sustainability being a drain on business value and financial resources. The reality is that if you get sustainability right and if you communicate it and report it strategically, you open up access to capital and reduce cost of capital. I did a workshop for a major energy company recently. It was interesting because after a three-hour seminar, the person who was the most energised and the most excited about it was the CFO. What was happening in that company was that they were making valuable contributions to the society, they were doing it strategically and measuring the impact, but they were not communicating and reporting it effectively. So, this CFO was going out and meeting with investors who were demanding for more reporting, documentation and information about the company’s sustainability activities, but she wasn’t able to produce it. So, she left the workshop energised about how moving towards a structured sustainability report was actually going to open up access to capital and reduce cost of capital. When you are a utility company that is financing billions of dollars of capital, fractions of percentages in the cost of capital can fund huge sustainability programme. So, there is a direct link. Sustainability is one of the best team-building exercises. Today, especially with young people, nobody wants to work with young people that they don’t feel good about and can’t be proud of. Sustainability offers companies an opportunity to reduce recruiting, to improve retention, improve the functioning of performance of teams. There is literally no better team-building exercise than a sustainability project. It brings together people from across the organisation and can build cohesiveness. Also, there is an extra value out of it because of the impact it has. You can look at the environmental side and the cost. We come from a paradigm that basically says pollute and profit. That is manage pollution and reduce profit. But that is changing.

Regulations, market requirements and the impact of climate change is driving that chain. So, now the opportunity is how to find ways to be more efficient in using environmental and natural resources that simultaneously cuts cost and reduce environmental impact. So, what we are seeing and what is accelerating is a shift from sustainability as a cost centre to sustainability as a value-producing centre. So, business is about efficiently producing and retaining value. That model hasn’t changed, that is still the process. It is just that in today’s climate, you need to integrate sustainability, social impact, environmental stewardship into that. So, it not a detour, it is central to any business. In another area where Nigeria is really leading and deserves commendation is on the Sustainability Development Goals (SDGs). Nigeria is making a lot of progress in driving the SDGs’ agenda. The president is doing a great job in driving that and the country has a great private sector advisory group on that. More and more, you see the private sector recognising the SDGs as a great framework for organising their own sustainability activities, investments and strategies and using that in a way that reports and communicates such that it helps them in creating additional value.

What advised do you have for a company that is faced with limited budget when there are other contending needs?

If sustainability can find a way to link itself directly to shareholders’ values so that it is well known, well documented and well understood, it deserves to have its own budgetary allocation. I recently wrote an article saying sustainability budget deserves same level of analysis and scrutiny as any other budget. Sustainability budget and investments need to connect to value creation. That is because if it doesn’t, why are you spending it? Budgets are done to create shareholders’ value. There is no rationale in the world that would suggest that you want to take part of your corporate resources and not use it in creating shareholder value. So, it is not that you are going out to do good, we have to do good for the society because it is our responsibility. Engaging with society and delivering social value is a strategic opportunity for businesses. Businesses that get that and build their internal capacity are going to be businesses that can produce superior returns and track records show that they are going to be businesses that are going to build competitive business advantage.